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Likelihood Corrections for Two-way Models


  • Koen Jochmans
  • Taisuke Otsu


The use of panel data models with two-way fixed effects is widespread. Incidental-parameter bias, however, invalidates inference based on the (profile) likelihood. We consider modifications to the likelihood that yield asymptotically-unbiased estimators as well as test statistics that are size correct under rectangular-array asymptotics. The modifications are widely applicable and easy to implement. Through several examples we illustrate that the modifications can lead to dramatic improvements relative to maximum likelihood, both in terms of point estimation and inference.

Suggested Citation

  • Koen Jochmans & Taisuke Otsu, 2019. "Likelihood Corrections for Two-way Models," Annals of Economics and Statistics, GENES, issue 134, pages 227-242.
  • Handle: RePEc:adr:anecst:y:2019:i:134:p:227-242
    DOI: 10.15609/annaeconstat2009.134.0227

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    Cited by:

    1. Bartolucci, Francesco & Pigini, Claudia & Valentini, Francesco, 2021. "MCMC Conditional Maximum Likelihood for the two-way fixed-effects logit," MPRA Paper 110034, University Library of Munich, Germany.
    2. Xuan Leng & Jiaming Mao & Yutao Sun, 2023. "Debiased inference for dynamic nonlinear models with two-way fixed effects," Papers 2305.03134,, revised Oct 2023.

    More about this item


    Fixed Effects; Information Bias; Modified Profile Likelihood; Panel Data; Penalization; Rectangular-Array Asymptotics;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models


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